Lord Oates: My Lords, I thank the noble Baroness, Lady Bennett, for bringing this debate before the House, and I share her consternation at the Budget presented yesterday. It was shocking but, in a sense, unsurprising, given the history of the Treasury on these issues.
The Green Book exemplifies everything that is wrong with our approach to policymaking. It embraces a myopic Treasury view that has somehow survived through multiple changes of Government, despite the damage it has done to our economy and our society, as well as to our planet. The Green Book claims that it provides objective analysis to support decision-making but, in fact, it represents an approach that elevates a narrow cost-benefit approach over long-term policy objectives.
I take the most recent example of the heat and building strategy introduced last week. Among other things, the strategy introduces a new grant scheme aimed at installing 90,000 air source heat pumps each year. The purpose of introducing heat pumps is presumably to reduce carbon emissions in order to contribute to our net-zero objectives, yet the Treasury has turned this objective on its head. The grant scheme it has approved—or, most likely, imposed on BEIS—has cut the link between the size of the grant and the carbon emissions saved, and has focused instead on maximising the number of heat pumps installed regardless of the impact on emissions. This, in the world of the Green Book, is value for money, presumably based on what it calls its benefit-cost ratio model, and which the rest of us know as a cost-benefit analysis. The Treasury’s language, like its priorities, is back to front. The Treasury’s own review of the Green Book made the point that it was far too reliant on that model.
Meanwhile, in the real world, the approach the Treasury has approved on heat pumps risks a colossal misallocation of finance, significantly inflating the cost for every tonne of carbon saved compared with alternative models. The BEIS Treasury scheme requires individual households to apply for grants to cover the cost of installing an air source heat pump, meaning the installation of these pumps will be on an atomised and inefficient basis, which will make planning for the electricity grid almost impossible and will come with the inevitably high costs of grant administration. The Treasury seems to have lost sight of the real objective, which should be maximising the reduction in carbon emissions, rather than installing the maximum number of heat pumps. The two are not necessarily the same, but Her Majesty’s Treasury does not seem to understand that fact.
Neither BEIS nor the Treasury makes any reference to having looked at comparative models of net cost for different deployment strategies, and it appears that they have not done their own work on the subject either. Can the Minister tell us, for example, what consideration the Treasury gave, if any, to an alternative network solution for heat pumps, installing collective ground arrays on a neighbourhood basis which individual households could then choose to connect to, just as households previously chose whether they wished to connect to the gas or electricity grids or the sewage system? Would that not be a much more cost-effective solution and much more practical for households, rather than each installing their own individual pump? Similarly, what objective analysis did the Green Book model imply for assessing the costs to, and practicalities of, the national electricity grid, for making provision to meet the huge spikes in demand that significant numbers of individual air source heat pumps, hazardously located around the country, could place on the grid when they have to switch to electric coil mode in cold conditions—the equivalent of a vast number of kettles being switched on at the same time?
The current approach that the Government are taking is as if, at the time we switched to gas in our homes, we had offered an individual grant scheme for any home to install a Calor Gas heating system without any thought as to how the Calor Gas would be distributed or of the huge additional costs to individuals and the economy of such an atomised approach. Thankfully, local and national government back then took a more thoughtful approach, creating first local and then national gas grids, which households could connect to. In those days, of course, the Treasury’s dead hand lay much less heavily on local government than it does today.
Can the Minister tell the House what options the Treasury considered? Did it, for example, consider alternatives such as issuing tenders for the installation of network heat pump arrays on a street-by-street basis? Such a model could ensure that installation was carried out in a planned way in tandem with the national grid; it could also ensure that deployment was prioritised for the coldest areas of the country and areas of greatest need. In turn, this could have driven the Government’s levelling-up agenda. Did the Government consider using a regulated asset-based model, allowing capped connection and standing charges to fund the necessary infrastructure over its lifetime? Did the Treasury use the Green Book approach to assess these various options before rejecting them, or did it just not consider them at all?
I dwell on the issue of heat pumps because it perfectly illustrates the failure of the myopic Green Book approach—the failure to look at the actual policy objectives that one is trying to realise, instead judging everything on a financial cost basis. It is on this basis that the Treasury can rationalise a policy that maximises the number of heat pumps installed while minimising the amount of carbon saved per pound spent and directing the majority of the spending not to those in most need but to the wealthiest areas in the country most likely to apply for the grant. In the weird and wonderful ways of the Treasury, it will most likely call that a success.
Of course, that is not the only area where the Treasury’s myopic approach makes it penny-wise and pound-foolish. There is a litany of examples down the ages in a whole range of areas, but particularly on the green agenda. First, there is the Green Deal, and the Treasury’s lack of vision or understanding of the carbon impact on our planet from a massive leakage of energy from our homes, leading it to insist on rates of interest that doomed the scheme to failure. On renewable energy, Her Majesty’s Treasury’s constant resistance ensured that the industrial benefits of Britain’s hugely successful shift to wind generation were largely enjoyed by competitor nations. The current short-sighted failure to take advantage of our industrial leadership on green hydrogen production makes it likely that, once again, we will hand that advantage to our overseas competitors.
Most recently, there is the monumental debacle of the Green Homes Grant scheme, which failed to deliver the home energy efficiency improvements that it promised, was catastrophically counterproductive in undermining the willingness of the construction industry to develop the skills needed for the green economy of the future, and failed even to provide the short-term stimulus that the Treasury claimed as the scheme’s raison d’être. In fact, the only stimulus that it really provided was to the private sector, in administrative fees of more than £1,000 per home. Such is the cost-effectiveness of Treasury thinking.
It is time for wholesale change to that model of government. It is time to recognise that we cannot keep talking about our net-zero targets while taking actions that completely contradict them; while we put forward a Budget that reduces taxation on the highest-polluting form of travel, at the same time as imposing record rail fare increases on one of the least carbon-intensive forms of travel. The country cannot afford to allow the Treasury to keep steering the ship of government on to the rocks on climate change issues. We need a wholly changed approach.